Total hedge funds assets increased 1.8% in November to USD3.070 trillion, according to eVestment’s Hedge Fund Asset Flows report for November 2014.
Performance gains accounted for the majority of the asset increase, however after two months of negative investor sentiment, investors allocated a net USD5.4 billion into hedge funds in November. November’s inflow increased YTD allocations to USD112.2 billion.
Investor interest in hedge funds in 2014 has been stronger than many expected, supported by multi-strategy fund flows and a renewed interest in equity hedge fund exposures. Aggregate flows are much higher than any year since 2007 and core growth rates (rate of asset change due solely to investor flows) have now surpassed 2010 levels (3.93% vs 3.71%), a year when the industry fully emerged from post-financial crisis redemptions.
Investor interest returned to equity-focused strategies in November. This is important because the volatility and losses from September and October set the stage for end-of-year redemption requests. While this may still occur in December (the industry’s second and third largest months of redemptions in the last two years were December 2013 and December 2012), the inflow in November indicates a healthy level of investor interest remains.
Credit fund flows were positive in November, a reversal from October’s redemptions. Credit strategies have endured a difficult period since the US dollar began its surge and oil its decline. Relative value strategies have had five consecutive months of asset-weighted performance losses, while directional credit returns have been mixed. As a result, we are seeing deviations in investor interest with a preference for directional credit exposure, aligning with the broadening notion that interest rates appear on track to remain low beyond the near-term.
Event driven funds appear, so far, to have been able to assuage investor concerns over the group’s losses in September and October. The universe received USD2.1 billion in November, bringing YTD inflow to USD43.8 billion, behind only multi-strategy funds for most investor interest in 2014. Interest in activist strategies continues as the event driven subset took in USD770 million of the group’s USD2.1 billion in November.
Managed futures and macro strategies have produced excellent returns over the last few months (managed futures to a greater degree), but investor flows remained negative into November. Macro funds have faced net outflows in the last six months and managed futures have seen outflows in twenty-six of the last twenty-seven months. In the case of managed futures strategies, it appears multiple years of industry underperformance is difficult to overcome in the near-term by institutional investors.
Macro strategies produced major deviations in performance among larger strategies in Q3, which appear to be weighing on flows in Q4. Specifically in November, macro funds that produced losses in Q3 accounted for virtually all the group’s USD4.1 billion of redemptions, however, flows for funds which were positive in Q3 have not yet seen strong interest.
Institutional investor investment policy decisions are often big ships that turn slowly. This is one major reason specific flow trends have persisted over time, despite recent performance. Multi-strategy funds are an excellent example of a segment which has been attractive to institutional investors, due in part to the concentration of large funds and diversified market, strategy and regional exposures. The group has enjoyed net inflows in each of the last seventeen months and in twenty-one of the last twenty-four months.
